The Internal Revenue Service’s so-called private letter
rulings, which let funds use foreign corporations and other
strategies to escape the tax implications of boosting commodity
holdings above 10 percent of income, are a “blatant end-run
around the legal restrictions,” Levin said today at a hearing
held by the Senate Permanent Subcommittee on Investigations.

The IRS has issued more than 70 such rulings since 2006,
according to Levin, the Michigan Democrat who leads the panel,
and Senator Tom Coburn of Oklahoma, the committee’s top
Republican. Levin said the IRS should permanently ban the
practice and revoke the existing rulings.

The IRS in June temporarily suspended new private rulings
pending a review of its policies. The IRS has an “open mind on
this issue” and may publish new guidelines, IRS Commissioner
Douglas H. Shulman told lawmakers at the hearing.

‘Law Is Unclear’

“The IRS does not like being in a position where the law
is unclear and it has to go and make interpretations,” Shulman
said. “We think there needs to be either law, preferably, but
in the absence of law, guidance of general applicability that
can be relied on across the industry.”

Under current tax code, mutual funds don’t pay corporate
income tax so long as they comply with limits on investment type
that say commodities can’t represent more than 10 percent of
income. Private rule-making by the IRS can allow funds to invest
more of their assets in commodities and exceed the 10 percent
limit, according to Levin.

“This issue is another example that shows how our tax code
is so convoluted that companies have to jump through hoops just
to operate,” Coburn said in a statement yesterday. “We need to
reform our rules so that everyone knows exactly what is expected
of them.”

Position Limits

Levin has pushed for greater limits on speculation in
commodities markets, including through so-called position limits
that would be imposed by the Commodity Futures Trading
Commission. The private letter process has “opened the
floodgates” to speculation by allowing more money to flow into
commodities markets, he said.

Forty mutual funds that use offshore units for commodity
investments had a combined $50 billion in holdings, according to
the committee. U.S. mutual funds held a total of $11.6 trillion
in assets at the end of November, according to the Washington-
based Investment Company Institute, which represents mutual-fund
firms.

The fund industry defended the private-ruling process and
said it has helped retail customers invest in commodities.

“There is a strong legal basis as well as administrative
practice that supports the IRS position here,” ICI General
Counsel Karrie McMillan said in a telephone interview yesterday.
“What funds are really trying to do is give their investors the
ability to invest to some degree in commodities.”

The IRS has received an additional 28 requests for private-
letter rulings during the suspension, Shulman said at today’s
hearing.

“We want to see the IRS continue to issue either the
rulings or just issue generalized guidance the industry can
follow,” McMillan said in the interview yesterday.